Intraday trading can be stressful and time-consuming. You have to log in to your exchange, pick the pairs you want to trade, read the charts and analyze the indicators before placing trades. If you make any mistake in the above processes, you could end up losing a lot of money. Thankfully, it is now possible to eliminate any emotional human error in trading thanks to algo trading. Algo trading also referred to as automated or black-box trading, is when trades are automatically placed with a computer program (algorithm) as opposed to the human trader placing the trades manually.
The trader defines the parameters of the trades based on their trading patterns. This means that the trader needs to have done some manual trading and established a trading pattern that works. Algo trading can be lucrative when done properly but if you do not know what you are doing, it might cost you a lot of dough. Before you decide to use algo trading, first of all, find out if your exchange supports it because some exchanges do not. There are many advantages to using algo trading. Let us look at some of them before.
Advantages of Algo Trading
• Best Price Trade Execution – using an algorithm to make trades helps to ensure you only execute trades at the best prices. This means your trades will be more profitable than if you were doing manual trades
• Instant Execution – with algorithmic trading, there is a greater probability of trades getting executed at the desired price levels. When placing trades manually, a fraction of a second delay is enough to miss out on the trade
• No Overtrading – overtrading is one of the greatest challenges faced by intraday traders. This is especially true with cryptocurrency trading because there are no limits to the trades one can make in a day. The problem with overtrading is you incur too many charges and you also are at a greater risk of making losing trades
• Simultaneous Market Analysis –a typical trading algorithm has several rules that it is meant to adhere to. The program automatically checks the market conditions and executes the trade as soon as the conditions are met. Make such real-time analysis would be hard if you were doing it manually
• Reduced Errors – the “fat finger” error is when a trader erroneously enters the wrong value when placing an order. The probability of making such errors when using an algorithm reduces significantly.
Even though the risk of making bad trades reduces when using algorithms, it is not recommended to put an algorithm to work before backtesting it. The purpose of the backtesting is to ensure the algorithm works as intended and more importantly – to ensure that the algorithm is actually profitable. Once you have done enough backtesting of the algorithm, you can deploy it on the live account. If it is your first time, you can start with small position sizes and then size in gradually as you progressively improve your algorithm.